(Article from Insurance Law Alert, October 2018)
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In a dispute relating to the scope of coverage under several facultative reinsurance policies issued by Clearwater Insurance Company, a New York district court previously made two significant rulings: (1) Clearwater need not pay expenses beyond the limits of liability in the reinsurance contracts (see November 2014 Alert); and (2) Clearwater is obligated to indemnify Utica’s reasonable and good faith settlement of the underlying asbestos claims pursuant to the follow the settlements doctrine (see February 2016 Alert). Last month, the Second Circuit vacated those rulings. Utica Mutual Ins. Co. v. Clearwater Ins. Co., 2018 WL 4568306 (2d Cir. Sept. 25, 2018).
Utica issued primary and umbrella policies to Goulds Pumps, a defendant in thousands of asbestos-related suits. Utica and Goulds reached a settlement regarding Utica’s liability under certain policies that lacked aggregate limits. Thereafter, Utica sued Clearwater, seeking indemnification pursuant to various reinsurance contracts. The parties disputed whether the liability limits in the reinsurance certificates were inclusive of expenses and whether Clearwater was obligated to “follow the settlements” with respect to Utica’s reasonable and good faith agreements with Goulds.
The Second Circuit ruled that the reinsurance certificates were expense-supplemental and thus required Clearwater to reimburse Utica for expenses in addition to the stated limits of liability. The court noted that there is no presumption under New York law that a per-occurrence liability limit in a reinsurance contract caps all obligations of the reinsurer. See Global Reinsurance Corp. of Am. v. Century Indem. Co., 30 N.Y.3d 508 (2017) (discussed in our December 2017 Alert). Here, the reinsurance certificates expressly “followed the form” of the underlying liability, and the court stated that Utica’s umbrella policies “plainly require Utica to reimburse Goulds for ‘expenses . . . in addition to the applicable limit of liability.’” The court therefore concluded that Clearwater’s certificates must likewise be expense-supplemental. The court distinguished New York cases involving policy language that expressly provides that reinsurance limits were “subject to” the amount of liability. Here, the court noted that pursuant to the follow the form clause, Clearwater’s liability is dependent on Utica’s underlying liability.
Addressing the follow the settlements issue, the Second Circuit ruled that Clearwater was not bound by Utica’s reasonable, good faith settlement decisions. The court held that neither the reinsurance certificates nor certain contracts through which Clearwater participated as part of a pool of reinsurers imposed a follow the settlements obligation. The court held that a provision stating that the certificate “shall follow the ceding Company’s liability in accordance with the terms and conditions of the policy reinsured hereunder except with respect to those terms and/or conditions as may be inconsistent” was a follow form clause and did not impose a follow the settlements obligation. Further, the court refused to find such an obligation implicit in all reinsurance contracts as a matter of law. The court therefore concluded that Clearwater’s indemnity obligations must be based on Utica’s proven liability under its umbrella policies. The court remanded the matter for such a determination.
This month, the Pennsylvania Supreme Court declined to review an appellate court decision similarly holding that facultative reinsurance certificates provide coverage for defense expenses in excess of the liability cap set forth in the reinsurance agreement. Century Indem. Co. v. OneBeacon Ins. Co., No. 68 EM 2018 (Pa. Oct. 15, 2018). There, the “Reinsurance Accepted’ provision stated that “the liability of the Reinsurer . . . shall follow that of the Company and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of the Company’s policy.” OneBeacon had argued that this language provided a cap for both indemnity and defense costs under Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990). The appellate court disagreed, explaining that the Bellefonte provision stated that the reinsurance was “subject to the terms, conditions and amount of liability set forth herein,” whereas here, the “subject to” clause referred only to the general conditions, not the reinsurance limit. The court also noted that its ruling was supported by the follow form provision because the underlying policies provided coverage for expenses in addition to limits. Century Indem. Co. v. OneBeacon Ins. Co., 173 A.3d 784 (Pa. Super. Ct. 2017) (discussed in our November 2017 Alert).